The Trillion-Dollar Annual Interest Payment

I often ask myself whether we are doing enough to be good stewards for America’s future. How will future generations be impacted by the actions that our nation’s leaders and its citizens are taking today? The recent Congressional Budget Office (CBO) report on the 2019 “Budget and Economic Outlook” makes it clear that we are not doing enough. In fact, we are failing. We are leaving our children and grandchildren a financial burden that may soon become untenable.

The CBO’s glimpse of America’s fiscal future is dismal— a national debt that balloons to $33.68 trillion by 2029, and that exceeds the nation’s gross domestic product (GDP) over the same period. The CBO also projects a return to $1 trillion annual budgeted deficits as the new normal (Exhibit 1).

Debt vs. Defense

When one compares future annual defense spending with annual interest payments over the next ten years, America’s fiscal future is compromised even further. Given the recent actions of Congress, and the years of prior inaction in changing the nation’s fiscal path, the U.S. government’s annual interest payment will eclipse annual defense spending in only six years. By 2025, annual interest costs on the national debt will reach $724 billion, while annual defense spending will reach $706 billion. To put that into perspective, in the 2018 fiscal year, the U.S. government spent $325 billion in interest payments and spent $622 billion in defense (Exhibit 2).

Of course, there is a difference between interest and defense costs. Interest payments do not strengthen national security, pay soldiers, or lay the groundwork for the military technology of the future. In fact, interest costs do the opposite. The increase in interest costs for federal spending over the next decade could dramatically squeeze the funds that the national government has available for discretionary spending on important government programs. Discretionary spending is already squeezed to less than one-third of the budget due to spending on mandatory entitlement programs and interest on the national debt. Moreover, defense spending accounts for more than half of discretionary spending. Because interest also acts as a mandatory expense and must be paid currently, unless entitlement spending is decreased and taxes increased during the next 10 years, discretionary spending (including defense and national security spending) will increasingly be crowded out by rising interest costs on the national debt (Exhibits 3 and 4).

Unless something changes, sometime in the next 15 years, the annual interest payment on the national debt will reach $1 trillion by itself. What will that large number mean for Americans who will have to face that reality and future leaders who will be tasked with solving such a burdensome financial reckoning?

A Crunch on Domestic Spending

As the Committee for a Responsible Federal Budget reports, in 2016, total federal spending for children was 9.8% of all federal spending (“By 2048, Only 6% of the Budget Will Go to Children,” July 6, 2018, http://bit.ly/2HgGxZQ; “Budgeting for the Next Generation: How Do Kids Fare?” June 7, 2018, http://bit.ly/2UwtQx3). By 2021, however, interest costs on the national debt will exceed total federal support (spending and tax breaks) for children, and by 2048, total federal spending for children will fall to only 6.3% of all federal spending. Contrast this with total federal support for children, which rose from 1.8% of GDP ($55.8 billion in 2018 dollars) in 1960, to 3.1% of GDP ($458.3 billion in 2018 dollars) in 2010 (Kimberly Amadeo, “U.S. GDP by Year Compared to Recession and Events,” The Balance, July 9, 2018, http://bit.ly/2Cii56j).

On February 25, 2009, I testified before the Federal Accounting Standards Advisory Board (FASAB) on the need for full liability accrual/GAAP accounting for U.S. budgeting and financial reporting (https://youtu.be/inGdtu3B4pE). While not endorsed by the FASAB, a compromise was reached to at least show the largest components of unfunded liabilities for entitlements as “sustainability” numbers just below the U.S. federal government’s balance sheet. Today, it is clearer than ever before that Congress is not heeding the dangerous trend of financial “unsustainability,” and that the time for a full and comprehensive accounting of liabilities, promises to pay, and federal obligations for unfunded federal pensions, guarantees, and insurance programs may have finally arrived.

In The Reckoning: Financial Accountability and the Making and Breaking of Nations, Jacob Soll, a professor of accounting and history at the University of Southern California, described the roots of our chronically imbalanced U.S. federal budget. According to Soll, successful societies, while they last, properly account for all economic and financial activity. They openly confront and disclose their liabilities as well as their assets, achieving accountability until one misfortune or another, or mismanagement, “gets the red ink flowing unchecked.” But Soll also makes the point that, in the past, nations went broke through ignorance, but today’s leaders have no excuse, since accountants are everywhere.

Restoring Balance

While accountants may be everywhere, the political will to use accounting principles that record all unfunded longterm obligations and political promises to pay is lacking. And since the accounting rules cannot be changed without legislation requiring the implementation of professional accounting standards and the enforcement thereof, the political establishment in Washington is not inclined to tell the truth about its deficit spending and the real size of the national debt. Elected officials may think that this could put their hold on reelection in jeopardy, which may sound to many like a classic conflict of interest

The public perception of such a conflict was made painfully clear by this author’s old accounting firm, Arthur Andersen & Co., in its 1986 publication “Sound Financial Reporting in the U.S. Government: A Prerequisite to Fiscal Responsibility”:

Given the existing practice of cashbasis budgeting and reporting, programs can be adopted, and promises made, without knowledge of their full cost. This lack of accountability creates an incentive for elected officials to curry favor with today’s voters at the expense of tomorrow’s taxpayers, and has been a root cause of fiscal mismanagement within the U.S. Government.

In the same publication, the firm confirmed what many experts in public sector accounting already know but find hard to believe even in 2018—namely, that full liability accrual accounting had been the law of the land since the passage of Public Law 84-863 in 1956. That law required U.S. government agencies to prepare GAAP–accrual basis financial reports like those required of publicly traded companies by the SEC to protect shareholders from fraud and mismanagement. Succeeding Presidential administrations and Congresses, however, largely ignored the enforcement and implementation of this law.

At their core, the issues facing American citizens go beyond the growing national debt and containing interest costs for the near future. The public needs to recognize that the accumulated annual budget deficits of the federal government represent a claim on the future standard of living of American taxpayers. Future generations face the prospect of being chained to the repayment of the public debt, plus interest, racked up by their predecessors. For our children and grandchildren, that may well mean the end of the “American dream” of economic opportunity, home ownership, job security, and family well-being. If we fail them, history will not judge us kindly.